'Don’t panic!' says the Fed

There was a whiff of Dad's Army about the Federal Reserve's 0.75% interest rate cut on Tuesday.

by
Last Updated: 31 Aug 2010

After two days of market turmoil in Europe and Asia, the Fed made the emergency cut to 3.5% just one hour before the stock exchange opened in New York, after yesterday’s public holiday – an obvious attempt to steady the ship ahead of some seriously choppy waters.

But since it’s the first emergency cut since 9/11, and the biggest single rate cut in more than 20 years (when interest rates were much higher), it’s a funny way of calming the nerves of jittery investors. In fact, to many it will just confirm their impression that the US economy (and by extension the rest of us) is in a whole world of trouble. We can’t help thinking of Lance-Corporal Jones from Dad’s Army, whose exhortations to his men not to panic tended to have exactly the opposite effect.

Sure enough, the Dow Jones index plunged more than 400 points (nearly 4%) as soon as it opened, while the S&P 500 also fell more than 2% - although both did rebound slightly afterwards. So less L-C Jones, more Private Frazer (favourite saying: ‘We’re doomed’).

The Fed wasn’t due to meet about interest rates until next week, but decided to take action ‘in view of a weakening of the economic outlook and increasing downside risks to growth’. Chairman Ben Bernanke said there were also signs of ‘a deepening of the housing contraction as well as some softening in labor markets’ – none of which sound like good news. The Fed even hinted that it might cut rates even further when it meets next week.

Opinion seems split as to whether the surprise move is a decisive intervention in a difficult situation, or whether it smacks of shutting the door after the horse has bolted.

But one thing’s for sure: it’ll put major pressure on the Bank of England to make a similarly aggressive cut next month. Will Mervyn King be borrowing a catchphrase from Captain Mainwaring next time he picks up the phone to Bernanke? ‘You stupid boy’...

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